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Derived Cost for Calculating Commissions

One of the more talked about items from Dennis’ presentation at Digital Marketing Strategies Conference yesterday was a proposed change in the way gross profit is calculated for the purpose of paying commission. The fundamental premise is that maximizing customer satisfaction requires a higher level of employee satisfaction. Much of the latter is compromised when employees feel the employer manipulates the cost from which gross profits are calculated.

A vehicle’s book value can be higher than the wholesale market value if it is not purchased right in the first place. It can also be inflated by packing the price with reconditioning costs. Repairs are generally packed into the book value of the vehicle at retail cost, creating a gross profit for the store that commissions are not paid on. We have heard dealers exclaim that the reconditioning pack is commission-free gross. Stores are small places, and it doesn’t take long for things like this to develop into an element of distrust that flows through the store.

The data exists today to allow dealers to pay commissions based on the difference between the retail price received and the wholesale market value of the vehicle, rather than book value. The result may not result in increased pay for sales people, but it does eliminate and age-old point of friction between sales people and store owners. Little things like this contribute to an increase in employee satisfaction and a decrease in employee turnover, both contributing to an increase in customer satisfaction, loyalty, and advocacy.

It should be noted that many stores are moving to a compensation model that does not factor in gross profits at all. Tom White Jr., owner of the nation’s leading Suzuki store, said in his presentation at DMSC that he pays a salary plus a bonus based on the number of units sold. In today’s world of market transparency, his feeling is that sales people have little contribution to the gross profit margin, but they do make a strong contribution to whether the up or appointment results in a sale. By paying them based on what they influence and what can be calculated without controversy, employees are more satisfied.

It’s time to take a hard look how employee satisfaction can be improved among front-line sales people. There is no silver bullet, but there are a multitude of little things that can be improved. From perceived fairness to increased training and better sales tools, this is an area where dealers can make a difference that will come back to them with a strong ROI.

We are seeing a number of dealers going the route of Tom White Jr.'s store. You may also want to consider factoring in a bonus for lowered (or eliminated) discounting. Sales folks don't set the asking prices, but it is their job to defend them.

The only part I disagree with is the "salespeople don't contribute to gross profit" part. While they may not be the one actually making the decision on what price to come back with, they are a HUGE factor as to whether or not the customer actually agrees to pay the asking price or not.
If a salesperson builds both great rapport/trust with the customer and tremendous value in the vehicle itself, the customer will usually agree to buy when the numbers are presented.

Thank you Lindsey and Dennis for highlighting this type of compensation plan for sales associates. I can certainly see how it will eliminate a lot of the complaints and distrust coming from the front lines. I like Ed's point on bonuses for "defending the write-back" and keeping a certain level of profit. Many work very hard in the presentation and demonstration of a vehicle building the value and they should be compensated accordingly in my opinion. Now paying devil's advocate here, if it is a flat salary and a unit bonus only, where does the incentive go to giving that "million dollar" walk-around? Please don't take this as my opposition to the structure. Maybe I just became "grumpy" after reading Brady's Super Bowl Commercials thread. ;)

Good point! The degree to which a salesperson contributes to the gross profit margin clearly has a lot to do with the pricing policy. At a fixed price store, the answer would be zero. At most stores, there is some level of contribution. Whether or not that contribution is significant enough to be factored into the compensation structure is up to the ownership or leadership team. If it is significant, then that is all the more reason to make that basis real instead of some bogus cost that includes an $800 pack.
Relative to other retail industries, we are plagued with a fear that our people will not do anything unless it is tied to their compensation. My experience with the international luxury hotel industry revealed a vary different story. Intrinsic motivation is alive and well in many industries. I'd love to hear thoughts on how store management can move beyond such a heavy reliance on extrinsic motivators, like financial compensation.

It is an unfortunate fact in our industry that the majority is in that type of mindset Dennis. We all know this and could certainly be a result of the culture within the industry over many years past. I am sure if we drill down hard enough we can point arrows in all different directions on how we arrived at this point. I also agree with you Dennis that intrinsic motivation is thriving in many other industries and we could certainly use more of those individuals in our industry. You definitely asked the million-dollar question on ways to move away from the motivators. I would start by saying having a team that understands the dealership's vision, has "bought in" to all processes in place and truly understands how much of an honor it is to be of service to anyone engaged with their organization will move further away from any external motivator much easier than a dealership that does not. If it were my dealership, yep, that is the foundation I would want to start with. I am curious to hear any other ideas as well and thoughts on my perspective.